As it ended its term for the summer, the Supreme Court issued its long-awaited ruling on a hot issue: whether developers of peer-to-peer (P2P) software can be held liable for the blatant and widespread copyright infringement committed by users of the software. The closely watched case was billed as a momentous struggle between fundamental values. The Court was told that it had to choose between supporting artistic creativity by granting strong copyright protection and promoting innovation by limiting liability for infringement committed by the users of new technologies. Ultimately, after acknowledging the tension between these principles, a unanimous Supreme Court decided the case on simpler grounds, ruling that the P2P software makers can be held liable because they actively encouraged users to infringe. Metro-Goldwyn-Mayer Studios, Inc. v. Grokster, Ltd. No. 04-480 (June 27, 2005).

The Grokster case was the latest round in the battle between the entertainment industry and P2P file-sharing networks. The music industry won the first round when Napster was held liable for its users' illegal copying and distribution of MP3 music files. The Napster ruling was based largely on the principles of vicarious and contributory liability. Although Napster did not actually commit infringement, it was liable for the infringement committed by its users because it knew about that infringement, did not take steps to prevent it, and actively assisted infringement by maintaining a central file index that allowed users to find the music that they wanted to download.

The technology involved in Grokster was different in significant respects from that at issue in Napster . Neither Grokster nor StreamCast Networks (another defendant) maintained a central file index, for instance, and claimed that they did not have the technical capability to prevent their users from illegally sharing copyrighted files. Grokster and StreamCast insisted that these distinctions made all the difference, relying heavily on the Supreme Court's landmark decision 20 years before in Sony Corp v. Universal City Studios, 464 U.S. 417 (1984). In that case, the television studios sought to hold Sony vicariously liable for copyright infringement committed by users of its Betamax video cassette recorders. The Supreme Court refused, because the technology had substantial non-infringing uses, primarily "time-shifting," that is, recording copyrighted television programs to watch at a later time. Although Grokster and StreamCast acknowledged that approximately 90 percent of the files shared on their systems were infringing copies of music and movies, they described their software as a neutral technology, one that could be abused but which also could be, and was being, used for substantial non-infringing purposes, such as sharing literary works in the public domain or music files that were released to the P2P networks by the recording artists themselves.

The Court of Appeals had been persuaded by this argument, holding that Sony immunized Grokster and StreamCast because their technology was capable of substantial non-infringing uses. The Supreme Court disagreed. It read its Sony ruling more narrowly, describing it as prohibiting courts from presuming intent to cause infringement merely from the fact that a product could be used to infringe. Importantly, the Court emphasized that in Sony there had been no evidence that Sony had intended or encouraged Betamax users to infringe. But "nothing in Sony requires a court to ignore actual evidence of an intent" to induce infringement, and the Court found plenty of such evidence here, including evidence that Grokster and StreamCast had actively targeted Napster's user base, had assisted users seeking help to download copyrighted songs, had made no effort to develop tools to control infringement, and had built its business on an advertising model, so that high-volume, infringing uses maximized their revenue.

Given the evidence that Grokster and StreamCast had actively encouraged infringement, the Court held that they could be held liable for inducing infringement by their users - a doctrine that was well-established under patent law but that had never before been explicitly accepted in the copyright context. In the Court's words, "we hold that one who distributes a device with the object of promoting its use to infringe copyright, as shown by clear expression or other affirmative steps taken to foster infringement, is liable for the resulting acts of infringement by third parties."

The Supreme Court's ruling was driven largely by the facts before it, and the implications will be teased out slowly, but certain principles are clear. Under Sony, technology companies cannot be held liable simply because their products can be used for infringing purposes, so long as there are substantial non-infringing uses. In view of Grokster, however, any company that releases a product with a substantial capability for infringing use should take care not to say or do anything that might be perceived in hindsight as fostering or encouraging infringement. A company with such a product needs to consider whether to develop tools that can be used to prevent infringement by users - potentially a catch-22, since Napster was held liable because it had the power to prevent users' infringement but did not - and whether to adopt an advertising model, which could be viewed as creating incentives to permit infringement.

Because Grokster leaves many issues open, it is unlikely to be the last word on the clash between the entertainment industry and file-sharing software. The next episode is likely to involve BitTorrent, a P2P technology that is used to distribute very large files, such as movies, over a widely dispersed network. Stay tuned.

Edward J. Naughton is a partner in the Boston office of Holland & Knight LLP. He practices in the areas of intellectual property, complex business litigation and appellate litigation. He may be reached at 1-888-688-8500. Mr. Naughton would like to thank Woodrow Pollack, a summer associate at the firm's Tampa office, for his assistance with this article.